If you’d rather live with a budget than on one, you’ll need to create a flexible money plan, which changes as your income and expense do. A static budget you create at the beginning of the year can help you be disciplined with your money, but a flexible budget lets you reassess your goals as you see how you’re doing each month. Creating a flexible budget is as easy as adding a few extra columns to a standard list of income and expenses.
The first step in preparing a flexible budget is to examine your recent spending habits. Gather your financial records from last year, primarily your bank and credit card statements. Bring your checkbook and PayPal statements to the table if you use those payment methods, for more detail. For the most accurate budget, collect one year’s worth of documents. List your expenses by fixed and variable spending. Fixed expenses such as car payments, rent or mortgage don't change. Variable expenses fluctuate each month, such as your electric bill or grocery spending. To create more opportunity for flexibility in your budget, break out discretionary expenses, such as entertainment or eating out.
Creating your Document
When you have all of your documents together, create the income and expense categories for your budget. List all the income, such as salary, an expected tax refund and income from investments. List your expenses in three sections: fixed, variable and discretionary. At the end of each row, add a “Total” column after your “December” column. Next to that, add “Budgeted Monthly” and “Budgeted Annual” columns. Fill in your expected income and expenses in your “Budgeted Monthly” column, and multiply those numbers by 12 to get your “Budgeted Annual” column numbers. Your “Total” column will fill in as you enter your numbers each month. This will create a basic budget document.
What Makes it Flexible
Adding more columns to a static budget to address changes in your income and expenses throughout the year creates a flexible budget. After your “Budgeted Monthly” column, you'll add an “Average Monthly” column. After your “Budgeted Annual” column, add a “Projected Annual” column. These columns let you track your actual monthly spending next to your budgeted monthly income and spending, and your projected annual numbers, based on your current income and spending levels, next to your annual budgeted numbers. Doing this will let you see if your actual expenses throughout the year need to be adjusted to meet your budget goals.
Using percentages to determine specific spending categories automatically reduces your spending if your money situation is tight, and increases contributions if you’re having a good year. For example, instead of budgeting a set dollar amount for your retirement or home down payment fund if you are renting, contribute a percentage of your excess income — or the money you have left after you’ve paid your monthly expenses. This will give you the flexibility to keep your contributions in line with you current reality, instead of your best guesses at the beginning of the year.
Rolling with the Changes
Re-examine your budget at least every three months to see how you are doing financially. By dividing your expenses into fixed, variable and discretionary categories, you’ll be able to see where you can cut spending if necessary, and where you can add funds if you’re doing well. With extra cash, you can pay down credit card debt, save for a vacation, increase discretionary spending, invest more or make larger contributions to your retirement of home savings. Don't forget to set aside funds for unexpected items such as a major car repair.
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